Certified Government Financial Manager (CGFM) Practice Exam 2026 - Free CGFM Practice Questions and Study Guide

A derivative instrument is best described as one that involves one or more reference rates and notional amounts. This definition captures the essence of derivatives, which are contracts whose value is derived from the performance of underlying assets, interest rates, currencies, or other financial metrics.

The reference rates provide the basis for the calculation of the derivative's value, while the notional amount is the amount used to calculate payments made between counterparties but is not exchanged itself. Examples of derivatives include options, futures, swaps, and forward contracts, all of which rely on these principles.

In contrast, options that mention no reference rates or notional amounts would fundamentally miss the primary attributes that characterize derivatives. Similarly, if a derivative required only cash settlement, it would not account for the variety of settlement mechanisms that exist, including physical delivery. Lastly, the limitation to physical asset trading does not accurately reflect the broad scope of derivative instruments, which can encompass various assets, not merely physical ones.